Feature
There is no doubt that the spectre of inflation is causing unease and eats into real bond returns. “Inflation would erode fixed income, though holdings of index-linked gilts will remain attractive,” Hedges says.
It is in this inflationary impact that Shaw has a warning for fixed income’s outlook. “I see more people beginning to realise the implications of the enormous government borrowings and stimu- lus packages on inflation and therefore in their asset portfolio and taking action. “Fixed income, therefore, in my opinion, has further adjustment coming over the next year,” Shaw adds. Such a scenario presents a potentially complicated and challenging picture for institutional investors. In March, the Bank of England kept interest rates at a record low of 0.1% and decided not to increase the pace at which it buys gov- ernment bonds, while showing little concern for inflation. At the
same time, the European Central Bank increased its bond-buying program from €500bn (£430bn) to a whopping €1.85trn (£1.59trn), which could see some active managers increase their bond exposure.
Although at some points on the yield curve there is a fundamental problem, with yields below -0.7% out to seven years, according Legal & General Investment Management (LGIM). “That means eurozone investors who hold the bonds to maturity can expect a materially lower return than if they just held cash at current deposit rate levels,” says John Roe, LGIM’s head of multi-asset funds.
Different landscape
“There is certainly no free lunch anymore,” is how Anand Kwatra, life and investment actuary at insurer Phoenix, assesses the situa- tion. “The future investment landscape will be very different from
May 2021 portfolio institutional roundtable: Fixed income 19
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